If your ultimate goal is to earn $1,000 per month in passive income, you'll need to know how much you need to invest upfront.
Generating $1,000 per month equates to $12,000 per year in dividend payments. And while it sounds ambitious, it's actually more straightforward than you'd think if you have the right portfolio of shares.
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Here's the math
There is an easy calculation to work it out, but the answer varies significantly depending on the yield of the ASX shares you're buying.
To calculate the investment you need, you can simply divide the annual income by the dividend yield.
For example, a portfolio which averages a 4% dividend yield will need a $300,000 investment in order to earn $12,000 per year (or $1,000 per month) in passive income.
A 4% yield is typical of major Aussie banks such as ANZ Group Holdings Ltd (ASX: ANZ), Telstra Group Ltd (ASX: TLS), and some other blue chip companies.
If the yield is higher, at around 5%, you're looking at a $240,000 investment.
A 5% yield is typical of stronger-yielding blue chip companies, energy shares or even some retail businesses such as Origin Energy Ltd (ASX: ORG) and Harvey Norman Holdings Ltd (ASX: HVN).
For an average 6% yield, you'll need to commit $200,000.
These will be your high-yield shares or real estate investment trusts (REITS). For example, Dexus (ASX: DXS) or HomeCo Daily Needs REIT (ASX: HDN).
And if you manage to create a portfolio with an average 8% dividend yield you'd only need to invest $150,000 to see the same passive income.
But you'd need to buy much higher-risk ASX shares or income trusts like the Metrics Master Income Trust (ASX: MXT) or the BetaShares Australian Dividend Harvester ETF (ASX: HVST).
Can't I just buy shares with the highest yield so I don't need to invest as much?
You could, but it wouldn't be the wisest investment idea. It's true that an 8% yield means you need to invest less to hit your $1,000 per month passive income goal.
But there is a catch.
Higher yields often mean higher risk. These companies might be unstable or there could be minimal dividend growth. Instead your focus should be on sustainable dividends over a long-term period, not the highest yield available today.
And the ultimate goal is diversification. A balanced and diversified portfolio can give you the best of both worlds.
